Is an increased line of credit with Northrop National Bank required for Butler Lumbers continued growth?

II. General Framework for Financial Analysis

To properly understand a company’s financial situation one must conduct analysis using fundamental financial statements. This analysis can help evaluate the overall health of the business through review of the Statement of Cash Flows. Gain insight into the assets and liabilities held by an organization through review of the Balance Sheet. Lastly, one should review the Income Statement to understand if the company is operating profitably and if there are areas in which the organization can leverage revenue generating or cost cutting exercises.

III. Application of the Financial Framework

Using the aforementioned financials, one can evaluate the cash flows and operating income for Butler Lumber to better evaluate the companies operating effectiveness. One can also evaluate a number of key ratios to better understand Butler’s situation. Understanding how the cash is being managed will greatly help in answering the question of whether Butler requires a larger line of credit.

As evidenced by the Income Statement rations (Exhibit 1) Butler is not experiencing greater cost to revenue year over year. Though they have seen a substantial increase in inventory, Northrop National Bank anticipates an equally substantial increase in revenue in the coming year. With the change year-over-year remaining essentially flat we must turn our attention to cash flow.

Butler Lumbers Statement of Cash Flows tells a story of a company that is expending more cash than it is generating. Upon further analysis one may note that there have been substantial increases in both Accounts Receivables and Inventory (see Exhibit 2 –Butler Lumber Company, Statement of Cash Flows) through 1990 and Q1 of 1991. As Northrop has indicated in their analysis, the company...